Present policymaking in the United States should have Hong Kong homeowners wondering whether they will still have a roof over their heads in a year or so; and if they do, how much it will be costing them in monthly mortgage repayments.

In a matter of months, as we pointed out last week, typical repayments have gone up about $2,500 or 27 per cent - and there is worse to come.

That is because Hong Kong interest rates are directly linked to US rates through the currency peg and there is a growing sense that US rates might be forced substantially higher in the months ahead to impose the sort of discipline currently lacking in American policy decisions and spending habits.

In the meantime, to those on the outside looking in - if not to the inmates themselves - it appears that most Americans and their leaders have agreed to play a collective game of make-believe because the truth is becoming too troublesome to deal with.

Make-believe, for instance, that it is winning the war on terror (and can continue to finance its current, ineffective campaign strategies at staggering cost for as long as it might take); that it can continue inflating an asset price bubble without any fear that it might implode; that it can continue gas-guzzling even though fuel prices have doubled; and that it can continue depending on savers around the world to pump about US$2.2 billion of fresh capital into its economy every day so that it can use the new money to repay existing investors and keep living on tick.

The aim of the game is to ignore, at all costs, the unpalatable fact that the US has accumulated a current account deficit that is heading for 7 per cent of gross domestic product. Americans spend 6.3 per cent more than they produce and are on track to add a further US$100 billion this year to last year's record US$668 billion deficit.

But guardians of the world's financial system are becoming less inclined to play along. So in the US, for example, the Federal Open Market Committee - the rate-setting body responsible for putting a price on the cost of money that should force borrowers to come to their senses if they are unable to do so themselves - altered its long-term inflationary outlook at its last meeting from 'well contained' to just 'contained'.

In the carefully chosen language of central bankers, that amounts to a Level 1 alert on a scale that has full-blown financial catastrophe on, say, Level 4. Analysts, accordingly, revised their rates outlooks and warned customers to brace for three 25-basis-point increases in the federal funds rate before the end of the year, instead of two.

The simple truth is that the risk of investing in US dollars steadily increases as net indebtedness rises and investors will require steadily increasing rates to continue holding those assets.

In Hong Kong, meanwhile, the monetary authority has steadily ratcheted its interest rate alarm higher and in the latest move now awaiting a response from lenders, has recommended a radical overhaul of the way that banks price their home loans.

Doing so with reference to shifts in prime lending rates as a benchmark is perfectly acceptable in marketplaces that are in control of their own interest rates, it points out, but not in Hong Kong, which is captive to movements in US rates. These movements generally feed directly into the wholesale domestic money market, to which lenders turn to raise their funds, but not into those prime lending rates which may remain 'sticky' in a rising rate environment in response to domestic competitive pressures.

To protect their margins in a rising rate environment, Hong Kong banks ought, therefore, to consider shifting to a more accurate and responsive benchmark called the 'composite rate', the authority says.

The composite rate is calculated from the 'average interest rate of Hibor3 and EDR weighted by the amount of interbank borrowings and the deposit composition of the entire banking sector'. Hibor3 is the interest rate charged on interbank borrowings for a three-month period and EDR is the effective deposit rate, calculated from interest paid on demand, savings and time deposits by selected banks and weighted by the deposit composition of the banking sector as a whole.

Although it sounds complicated, the simple essence of the composite rate calculation is that it gets as close as possible to producing a widely applicable effective cost of funds as that cost rises and falls in response to shifting US rates.

Yet the early signs are that Hong Kong's banks are lining up to give the proposal a thumbs down, chiefly because explaining the new volatility that the new rate would introduce into home lending rates will prove too difficult a task.

That may temporarily insulate Hong Kong's homeowners from the worst effects of US interest-rate rises but wherever the domestic cost of funding goes, prime lending rates are sure to follow - even if that might happen with a bit of a time lag.